Gold: recovery is on track

Finding the right store of value will be an investment challenge in the second quarter 2019. We believe that gold is one such store of value and that it deserves closer attention.

Mounting global growth worries and rising risk aversion in the equity markets provided support to gold late last year, underpinning its role as a safe haven. While growth worries faded and equity markets rebounded, gold prices continued to move higher. Following the recent rally, we believe a short-term consolidation looks likely, as headwinds from the US interest-rate cycle could return. The US dollar should stay strong for some months, partly reflecting the weakness of other currencies. Apart from these short-term headwinds, we see gold’s longer-term recovery as being well on track and reiterate our constructive view. Looking back over the past few years, we have never been this confident about gold’s outlook. 

Phase 1: normalisation of market sentiment
The first phase of the recovery, characterised by a normalisation of market sentiment, seems to be completed. Such sentiment cycles are a characteristic of commodity markets, amplifying trends and pushing prices away from fundamentally justified levels. Going forward, we believe shifting expectations about US monetary policy will continue to influence sentiment in the gold market and remain a source of volatility. 

Phase 2: end of consolidation 
The second phase should start around the middle of this year, once the US dollar loses its lustre. The impact of the dollar on gold should not be underestimated. Historically, gold gained more than 2% per month when the dollar was down and lost around 1% per month when it was up. 

Phase 3: safe-haven demand returns
The third and last phase should follow early next year, when we expect a significant slowdown in global growth. This should lure safe-haven seekers back into the gold market. While we saw an increase in safe-haven demand already late last year as risk aversion rose, we believe it should be much stronger once the slowdown materialises and evidence of a recession grows. Returning safe-haven demand should soften gold’s tight relationship with the dollar, making it less dependent on US monetary policy and putting the recovery on a more solid footing. 

The recovery could be extended if Chinese investors return to the gold market, attracted by either the price performance or a deteriorating domestic backdrop. Such synchronised buying in the Western world and in China has hardly ever occurred in the past, as China’s accumulation of wealth gained traction only over the past decade. This would be a very powerful price driver. 

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